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My bullish case for QuickLogic

Stocks around the world were a great place to invest in 2013. Unfortunately, not the small cap stocks in the Gehman Undervalued Growth Companies portfolio. The portfolio lagged the market badly in 2013.

Most of the companies in my portfolio had positive developments throughout the year, but the stock prices did not reflect that progress.

Andy Pease became the President and CEO of QuickLogic (QUIK) in April, 2011. In my opinion, the company has been making steady progress ever since. Andy is forward looking with an ability to work with his customers to determine what they need and how he can deliver the product. In my view, he’s also a great problem solver.

Earnings results for the third quarter of 2013 may be evidence that the new strategy has promise. Revenue reported was $9.1 million (Note: there was an accelerated delivery of $1.5 million in product to Samsung) versus a projection of $6.0 million

QUIK has been developing a number of new products. Samsung established a direct sales relationship with QUIK in 2013. Now QUIK works directly with Samsung to troubleshoot existing products and to develop new technology and products.

In November, QUIK raised over $20 million in an equity offering that will finance their ability to expand production and sales for the foreseeable future.

Sensor technology is the new trend in mobile devices. Cell Phones, for example, will sense where you are, what you are doing and where you are going. With sensors all sorts of things can happen. Your cell phone will be able to unlock your front door before you arrive, turn on the heat, and many more applications we haven’t even thought about.

“Sensor” chips must be “always on” to always sense where they are; they must be “ultra low power” so they don’t wear out the battery; and they must be programmable – and reconfigurable so the device manufacturer can rapidly develop their desired “sensor” technology.

In addition to standard products, QUIK develops products that are designed for specific customer use. There is no guarantee of success – QUIK has been “burned” in the past – but the odds improve when products are designed for specific customer use.

QUIK has been marketing one chip that hopefully gains broad acceptance – shortly. This chip allows mobile products (tablets, cell phones etc.) to be read in sunlight, or darkness, with reduced power consumption. In my opinion, QUIK is on the launch pad, though there is always investment risk with a small company.

The performance of EZCH Semiconductor Ltd (EZCH), my biggest holding, is testing my patience. The stock is trading in the low 20’s. In my opinion, it should be trading much higher.

The traditional business of EZCH is pretty special. On January 4, 2014, Rick Neaton with Rivershore Investment Research wrote a recent “Market Currents” (Paid Subscription):

In the February 8, 2012 earnings conference call, Eli Fruchter (Chairman, EZCH) stated The NP-4, which only entered production at the end of the year, contributed to 21% of 2011 revenues, over 90% from sample shipments.”

During the Q&A in some investor presentations held in Israel during the week of November 18, 2013, EZChip’s CFO Dror Israel stated that year-to-date, NP-4 revenue was 50% of 2013 revenue. He also stated that this percentage had been growing each quarter and that by year end; it could be 70-80% of 4Q-13 revenue. He said that 60% of all EZChip products sold in 2013 would be the NP-4. He expected that product mix to continue in 2014.

EZCH has a solid balance sheet with about $190 million in liquid assets with no debt, according to the company’s financial releases.

I expressed my frustration to Rick Neaton, who responded with an excellent article in which he wrote that “markets are efficient – not smart.” That is, the markets work to get a marketable price, but it doesn’t mean that all the decisions” of the buyers and sellers are smart.

Rivershore believes that EZCH share price should be $36–i.e., a multiple of 30 times expected 2013 non-GAAP EPS of $1.20, because EZCH is projecting a 30% compounded average annual growth rate (CAAGR) between FY 2012 and FY 2016. The market is projecting a 20 times multiple.

Neaton says: “’Why don’t the markets see the future greatness of this company? The real question is, “Do they ever see this in most stocks?’ Not really.”

Rick goes on with an extended discussion about how the price of EZCH stock is tracking very closely with how Apple (AAPL) traded for four years before the value of the iPod and subsequent mobile devices was recognized.

Since 2010, EZCH has spent considerable time and money developing a revolutionary processor that contains Layer 2-7 functions (current EZCH processors only access Layers 2 and 3) that will access the data center market. This processor, the NPS, will permit the “data centers themselves to deploy applications in their premises and in their networks where they need them.”

“The stock markets do not reward stocks until after the introduction of their new products. NPS has not yet sampled,” according to Neaton. (Note: NPS is projected to sample in late 2014, according to EZCH)

“Once it becomes certain that EZCH will meet its 2016 targets of $150-160 million of revenue,” Neaton points out, “the market will begin to pull those expected revenues forward into the current share price.”

Neaton’s analysis in my opinion is helpful. I hope it gives investors comfort in my conviction to maintain EZCH as my largest holding.

Have a very healthy and happy 2014.

DISCLAIMER: The investments discussed are held in client accounts as of December 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

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